What is a mobilisation advance?
A mobilisation advance is money a client pays a contractor before any work has been billed, to fund site establishment and early costs, and it is recovered out of later running account bills rather than being kept.
Also called advance payment, mobilization advance.
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Mobilisation advance in plain words
It is a loan dressed as a payment. The contractor gets cash at the start, usually against a bank guarantee, and every subsequent RA bill is reduced until the advance is repaid. On most government contracts it also carries interest.
How is mobilisation advance calculated?
net payable on a bill = value certified - retention - advance recovery
Recovery is normally a fixed percentage of each bill, so the advance repays itself faster on a project that bills quickly.
Mobilisation advance: a worked example
A CPWD-style advance on a project with a tendered value of 80 crore.
- Advance, capped at 10% of tendered value
- ₹8.0 Cr
- Simple interest, per CPWD GCC 2019
- 10% a year
- Bank guarantee required
- 110% of the advance, kept renewed
- Held for roughly a year before full recovery
- ₹0.80 Cr interest
- Cost of the advance
- about ₹0.80 Cr plus bank guarantee charges
Figures follow the CPWD General Conditions of Contract 2019 as cited in Crestline's post on mobilisation advances. A private contract can set anything; read Schedule F before using these.
Why does mobilisation advance matter?
Taken as free cash it is the most expensive money on the project. Taken as a priced loan it is sometimes the cheapest, because the alternative is working capital at a bank's rate.
Where does mobilisation advance mislead?
Recovery is invisible in revenue. The bill shows the work certified; the cash shows the work certified less recovery. A project that looks like it is collecting well can be collecting almost nothing while the advance unwinds.
What do people get wrong about mobilisation advance?
- Treating the advance as revenue
- It is a liability until recovered. Spending it as though the project had earned it is how a contractor runs out of cash in month nine of a twelve month job.
- Forgetting the interest clock
- Under CPWD conditions interest runs from the date of payment to the date of recovery, both days inclusive. An advance taken early and recovered late costs more than the rate suggests.
- Letting the guarantee lapse
- The bank guarantee has to be kept renewed to cover the outstanding balance. A lapsed guarantee can stop certification of the next bill entirely.
How does Crestline measure mobilisation advance?
Crestline reads the recovery line on each RA bill, so the gap between value certified and cash received is explained rather than discovered at the end of the quarter.
The working-capital lens